Your Credit Card's Rewards Program Is Doing A Lot More Than Earning Cash Back
If you signed up for a credit card to rack up airline miles, cash back, sign-up bonuses, or other earnings, you're not alone. Rewards programs are one of the main reasons consumers get credit cards, and according to CreditUnions.com, sign-up bonuses motivate a whopping 35% of consumers to apply for a new card once a year or more. Applying for that many credit cards in such a short timeframe may not be the best tactic for your finances in the long run, but the point remains: Credit card rewards programs are a huge success. But do you know what they're doing behind the scenes?
Ultimately, credit card companies are businesses looking to profit. And, while collecting interest and various fees may be their obvious income streams, the other side of it involves collecting user data. This data allows credit card companies to capitalize further, especially as it becomes a mainstream commodity in the digital economy. Besides, rewards programs have expanded considerably over the years to encompass everything from everyday life expenses to vacations and entertainment. So, along with letting you accumulate points, your card may also be playing a significant role in shaping your shopping decisions.
None of this is necessarily a bad thing, depending on your personal views on privacy and how much you like using your card for rewards. That said, understanding what your rewards program is doing beyond the cash back can help you make more informed decisions as a consumer.
As credit card rewards programs expand, so do their data mining operations
Federal Reserve data shows credit cards have grown to be the leading payment method as of 2024, accounting for 35% of all payments (compared to 30% for debit cards and 14% for cash). Coinciding with increased credit card use has been the growth of rewards programs. A 2023 report from the Consumer Financial Protection Bureau (CFPB) says that reward card use grew substantially between 2015 and 2019, to comprise 90% of all credit card spending. However, the report also says that these rewards programs are costly, and they likely lead companies to raise their profit margins to offset the related expenses. In addition to the dark truth that credit card companies offering rewards want you to carry a balance, data mining could be a way of increasing profits regardless of what you pay off each month.
Obviously, few people will sign up for a card that actively advertises its data mining practices. However, look closely at your own credit card's terms of use, and you may find verbiage indicating that the provider will ask for your authorization to collect various types of data and share it with third parties. Cards like Atmos Rewards take things a step further; its terms stipulate that any click on partner links while redeeming points for hotel stays is an agreement to have your data shared with these partners. Of course, additional behind-the-scenes partnerships may yield further revenue from data sharing. In 2018, for instance, Bloomberg revealed that Mastercard sold credit card transaction data to Google, which the search engine company allegedly used to track ad effectiveness.
Credit card rewards may influence your spending decisions
According to recent studies, credit cards incentivize spending. For example, an MIT study from 2021 found that credit card purchases lead to "pleasure" reactions originating in the same "reward" part of the brain triggered by addictive drug use, likely driving the urge to spend more. Meanwhile, the reward programs that come with many of these cards are partly designed to shape consumers' spending habits.
For example, if you have an airline-branded rewards card, chances are you signed up after receiving a bonus offer while paying for a flight. Now, the promise of further rewards will keep you incentivized to fly with that specific airline. Likewise, if you have a Discover card where the rewards rotate each quarter to include different retailers, you may find yourself shopping more at specific stores when they give you the most cash back.
If you're paying off your credit card each month and aren't going into debt to rack up rewards, none of this may be seen as an overtly bad thing. However, it is important to tread carefully here and frequently reevaluate your spending behavior. Popular store-brand rewards cards can be particularly dangerous, as they often come with high APRs, limited spending options, and relatively few rewards compared to other cards. Ultimately, what you gain in return may not be worth it with every card.